Seasoned Equity Offerings Announcements Research Articles

Can existing corporate finance theories explain security offerings during the COVID-19 pandemic?

We document substantial increases in corporate security offerings during the COVID pandemic. While the increase in seasoned equity offerings (SEOs) can be attributed to shifts in macroeconomic conditions, increases in convertible and straight bond offerings cannot be explained by standard security choice determinants. We furthermore find that COVID-period SEO announcements are often contaminated with Research and Development (R&D)-related news, with the SEO proceeds more likely to be hoarded as cash. Overall, COVID-period SEOs align with market timing behavior, but the increase in COVID-period convertibles and straight bonds cannot be reconciled with pre-pandemic corporate financing rationales or government interventions. We furthermore demonstrate that the COVID pandemic differs substantially from the Global Financial Crisis (GFC) in terms of security offering choices and announcement returns.

The role of media connections in seasoned equity offerings

AbstractWe present evidence that corporate connections to the media are associated with a greater likelihood of a seasoned equity offering (SEO), more negative announcement returns, and poorer long‐term performance. The effect of media connections on announcement returns is more pronounced for firms with higher information asymmetry, greater financial constraints, and lower advertising expenditures. Media connections are positively associated with media coverage and sentiment before the SEO announcements. Our findings are consistent with the notion that SEO issuers use their connections with media firms to actively manage media coverage and successfully offer new equity.

ETF Ownership and Seasoned Equity Offerings

AbstractThis article investigates the impact of exchange-traded fund (ETF) ownership on seasoned equity offerings (SEOs). We find that increases to firms’ ETF ownership is positively related to their propensity to conduct an SEO. ETF ownership is also associated with less negative SEO announcement returns, smaller discounts, and better long-run stock returns. Our evidence is consistent with equity issuance following investor demand for stocks driven by greater participation in ETFs, suggesting a possible alternative source of market timing opportunity.

The impact of the pandemic policy storm on the stock price of Taiwan property insurance industry

<p>本文採用事件研究法來檢驗防疫保單之亂對產物保險業股價的影響。本文定義兩個重要事件，一為2022年4月7日疫情指揮中心首次提出「從清零走向與病毒共存」的政策宣告，二為現金增資宣告。實證結果發現從清零走向與病毒共存之宣告存在正向效果，隱含經濟活動即將復甦，投資人已提前反應並持續看好至事件發生後第四天才收斂。收斂原因係事件發生後第五天投資人明確接收到「理賠從寬認定」的訊號並反應在股價上產生顯著超常負報酬。第二現金增資宣告效果對於擁有產物保險子公司之金控公司不存在，未引起恐慌。但對於專營再保險的公司以及大股東為汽車製造業的公司而言，現金增資宣告存在負向效果，但很快收斂。本文實證結果將有助分析未來類防疫保單出現時防疫政策改變對股價的影響，及作為未來投資決策參考方向。</p> <p> </p><p>This paper uses the event study to test the impact of the pandemic policy storm on the stock price of Taiwan property insurance industry. This study defines two important events, one is the policy announcement that the Epidemic Command Center first proposed “from zero to coexist with the virus” on April 7, 2022, and the second is the announcement of seasoned equity offerings. Empirical results found that there is a positive effect from the declaration of clearing to coexistence with the virus, implying that economic activities are about to recover, and investors have reacted in advance and continued to be optimistic until the fourth day after the event. The reason for the convergence is that on the fifth day after the event, the investor clearly received the signal of "claims leniency determination" and reflected a significant abnormal negative return on the stock price. The effect of the second seasoned equity offerings announcement does not exist for the financial holding company that owns a product insurance subsidiary, which does not cause panic. However, for companies specializing in reinsurance and companies whose major shareholders are in the automobile manufacturing industry, the seasoned equity offerings announced that there is a negative effect exists, but it will soon subside. The empirical results of this paper will help analyze the impact of changes in pandemic policies on stock prices when future pandemic policies appear, and serve as a reference direction for future investment decisions.</p> <p> </p>

CEO-friendly boards and seasoned equity offerings

This paper investigates the effect of CEO-friendly boards on seasoned equity offerings (SEOs). We provide evidence that CEO-friendly boards have a negative and statistically significant impact on SEO announcement returns. This finding suggests that SEO announcements by firms with CEO-friendly boards signal agency problems and, therefore, investors react negatively to such SEO announcements. We further provide evidence that the negative effect of CEO-friendly boards on SEO announcement returns is weaker in firms with high growth opportunities and high liquidity needs. Finally, we document that CEO-friendly boards are also negatively associated with post-SEO long-term performance.

Investor Perception, Market Reaction, and Post-Issue Performance in Bank Seasoned Equity Offerings

Using a large sample of bank seasoned equity offerings (SEO) from 2002 to 2017, we first documented detailed descriptive statistics, and showed that nonperforming assets ratio, our primary measure of bank asset quality, reached the highest value immediately after the 2008 economic crisis, which also corresponds to a higher number of SEOs around these years because banks needed to recapitalize. The capital ratio, which is required to be at least at a minimum level (relative to risk-weighted assets) for banks by regulation, also increased after the economic crisis, which may be due to a higher requirement for banks as well as banks’ desire to hold more capital. The SEO announcement period abnormal stock-returns reached the lowest number around the economic crisis, as did the longer-run 6-month, post-SEO cumulative abnormal returns and buy-and-hold abnormal returns. Examining the differences between banks, we found, in both univariate and multivariate regression results controlling for other variables, that the bank capital ratio as at the time of the SEO announcement is significantly and positively associated with announcement period abnormal returns, while nonperforming assets ratio of the bank as at the time of SEO announcements is not. However, the nonperforming assets ratio as at the time of the SEO announcements had a significantly negative association with post-SEO, 6-month longer-run abnormal stock returns, while the capital ratio did not have any significant association. The nonperforming assets ratio as at the time of SEO announcement was also significantly and negatively related to bank return on assets 6 months and 12 months after SEO, while the capital ratio was not. Thus, investors appear to perceive a well-ingrained, well-publicized regulatory norm—the capital ratio—as indicative of value creation as at the time of bank SEO announcements, while loan asset quality, which may be relatively more opaque, may determine post-SEO performance.

Cash shortfall, SEO offer size, and SEO announcement returns

We examine the announcement returns of 3483 seasoned equity offerings (SEOs) during the 1996–2018 period. Although there is a significant decline in SEO announcement returns, we show that cash shortfall in the year before SEO has a positive impact on SEO announcement returns. By matching SEO offers sizes and cash shortfalls, we also find that negative announcement-period returns become positive when SEO offer size is determined in concert with cash shortfall. Patterns of long-run abnormal firm performance after SEO announcements are consistent with those we document for the announcement-period returns. Our results suggest that cash shortfall in the year before SEO as indication of funds needs mitigates agency spending of SEO proceeds, and thus, the market welcomes the SEO announcement with positive stock price reactions.

Corporate R&D spending, subsidies and stock market reactions to seasoned equity offering announcements: evidence from China

PurposeThis study focuses on an emerging market, China, and investigates the effects of corporate research and development (R&D) spending and subsidies on stock market reactions to seasoned equity offering (SEO) announcements.Design/methodology/approachThe study uses a sample of SEOs announced over the period of 2003–2018 in the Chinese A-share market. The cumulative abnormal stock returns (CARs) are adopted to measure the stock market response to SEOs. The R&D spending-to-sales ratio (R&D subsidies) in 2 years before SEO announcements is used to measure the pre-SEO R&D spending (R&D subsidies). The instrumental variable (IV) regression method is applied to address the endogeneity problem in the robustness test.FindingsThis study demonstrates that firms with high R&D spending suffer stock overpricing and experience a negative market reaction when they announce SEOs, but R&D subsidies alleviate stock overpricing and mitigate the negative relationship between R&D spending and SEO market reactions.Originality/valueAlthough the prior studies have demonstrated that information asymmetry, which causes stock overpricing, explains negative stock market reactions to SEOs, it is unclear if a certain factor that causes information asymmetry affects SEO market reactions. This study fills this gap and focuses on R&D spending, demonstrating that R&D spending is negatively related to SEO performance.

Directors' and officers’ liability insurance and the pricing of seasoned equity offerings

This study examines how financial markets price the information regarding the purchase of directors' and officers’ (D&O) insurance within the context of seasoned equity offerings (SEOs). We find that SEO firms carrying D&O insurance policies or higher insurance coverage experience less negative announcement effects. Further analyses show that the positive association between D&O insurance and SEO announcement effects is more pronounced for firms with higher director ownership but face weaker monitoring from product market competition. The evidence supports that the purchase of D&O insurance can serve as a form of monitoring D&Os, especially when external governance is weak.

Stock derivatives and seasoned equity offerings

PurposeThe article aims to explore if stock derivative types (stock options and stock warrants) are associated with stock returns for firms undergoing seasoned equity offerings (SEOs).Design/methodology/approachThe authors regress stock returns against stock derivatives for periods around SEO announcements with standard errors clustered at the month level.FindingsThe authors find that lower stock derivatives holdings for the fiscal year after the SEO are associated with superior pre-SEO returns. This can be explained by owners exercising their derivatives to capitalize on the pre-SEO price run-up. The authors find that greater stock option holdings by insiders for the fiscal year after the SEO are associated with superior post-SEO returns for up to ten years after the SEO announcement. This new finding does not hold for stock warrants.Research limitations/implicationsStock derivatives are supplied by Capital IQ. Given their description, the authors infer that stock options are owned largely by insiders. Thus, the insider conclusions for stock options depend on this implication.Practical implicationsStock options and stock warrants can be used strategically to reward stock derivative owners of strong performing firms for past performance. Stock options can be used to motivate insiders (primarily key executives) to achieve superior future performance.Originality/valueThis study is unique in comparing the influence of holdings for stock options and stock warrants on stock price performance around SEOs. The authors show that the sign of the association depends on whether the test includes pre-SEO periods.

Banks’ Seasoned Equity Offerings Announcements and Central Bank Lending Operations

Banks’ Seasoned Equity Offerings Announcements and Central Bank Lending Operations

CORPORATE GOVERNANCE AND STOCK MARKET REACTION TO SEASONED EQUITY OFFERING ANNOUNCEMENT BY FIRMS IN NIGERIA

This study examined the effect of corporate governance variables of board independence, institutional ownership, managerial ownership, board size, and director expertise on the market reaction to seasoned equity offering (SEO) announcements by firms in the Nigerian stock market. The event study methodology was employed, and abnormal returns were computed using the market model. A total of 62 announcements by 38 firms listed on the Nigerian stock exchange from 1st January 2006 to 31st December 2016 were included in the analysis. The study recorded significant positive cumulative abnormal returns before and after the announcement day, and a significant negative cumulative abnormal return upon the announcement day of SEOs. Similarly, significant positive cumulative abnormal returns were recorded six months before the SEO announcement day and negative significant cumulative abnormal returns six, twelve, and twenty-four months after the announcements. Furthermore, there were significant cumulative abnormal returns upon SEO announcements for all the proxies of corporate governance assessed by the study. The implication of the findings of negative significant cumulative abnormal returns on the day of the announcement and beyond was consistent with previous arguments that firms issuing SEOs earn negative abnormal returns on the day of the announcement was the result of the information asymmetry between managers and investors. By contrast, the significant cumulative abnormal returns based on corporate governance suggested that corporate governance significantly impacted on SEO announcement returns in Nigeria. These findings suggest that policy makers should pay more attention to directors’ expertise, institutional ownership, board independence, and board size, as our results showed that investors might view them as dependable pointers of positive corporate information for the market, thus guaranteeing the best use of SEO proceeds.

The Role of Investor Attention in Seasoned Equity Offerings: Theory and Evidence

Models of seasoned equity offerings (SEOs) such as Myers and Majluf (1984) assume that all investors in the economy pay immediate attention to SEO announcements and the pricing of SEOs. In this paper, we analyze, theoretically and empirically, the implications of only a fraction of investors in the equity market paying immediate attention to SEO announcements. We first show theoretically that, in the above setting, the announcement effect of an SEO will be positively related to the fraction of investors paying attention to the announcement and that there will be a post-announcement stock-return drift that is negatively related to investor attention. In the second part of the paper, we test the above predictions using the media coverage of firms announcing SEOs as our main proxy for investor attention, and find evidence consistent with the above predictions. In the third part of the paper, we develop and test various hypotheses relating investor attention paid to an issuing firm to various SEO characteristics. We empirically show that institutional investor participation in SEOs, the post-SEO equity market valuation of firms, SEO underpricing, and SEO valuation are all positively related to investor attention. Lastly, we also use the number of SEC EDGAR file downloads as an alternative proxy for investor attention, and our findings are robust to this alternative investor attention measure. The results of our identification tests show that the above results are causal.

Managerial Financial Education and the Valuation Effects of Seasoned Equity Offerings: Evidence from Taiwan

AbstractThis paper tests how managerial financial education explains the valuation effects of seasoned equity offerings (SEOs). Using a sample of Taiwanese listed firms during 2007–2018, our results show that investors react more negatively to SEO announcements by firms with more financially educated managers (MFEMs). Such a negative effect is more pronounced for firms with a higher information asymmetry and more earnings management. Further evidence indicates that SEO firms with MFEMs are substantially overvalued and thus experience a significantly long‐run post‐SEO underperformance. MFEMs are also found to reduce their ownership prior to SEOs. Our overall results support the opportunism‐based information advantage hypothesis.

Buying Manipulation around Seasoned Equity Offerings

We show that seasoned equity offerings (SEOs), in which secondary share-offering size greatly exceeds market share turnover, provide a unique opportunity for stock price manipulation by speculators holding restricted shares. The proposed new theory is consistent with several puzzling empirical findings, for example, the positive abnormal stock return between announcement and issuance and the long-term poorer returns of issuing firms after SEOs. The manipulation is characterized by a strong buying in the secondary market prior to the issuance, which drives up the market price and thereby the offering price of restricted shares, and a large amount of liquidation of restricted shares in the SEO. Our model predicts that favorable market reactions with speculator's manipulative intent after SEO announcement could occur, which naturally leads to a successful issuance and over-investment based long-term underperformance after SEO.

Do capital markets value corporate social responsibility? Evidence from seasoned equity offerings

Abstract We explore whether firms’ corporate social responsibility (CSR) activities provide added value to capital market participants through seasoned equity offerings (SEOs). SEOs represent cleaner exogenous activity alleviating the reverse causality issue plaguing many prior studies examining the relation between firm performance and CSR. Using a large sample of U.S. SEOs, we find high-CSR issuers experience fewer negative market reactions to SEO announcements. We also show ethical issuers have incentive to provide extensive and informative disclosures, which mitigate the degree of information asymmetry, thereby decreasing SEO underpricing. Among CSR categories, we find issuers engaging in community and environmental CSR activities and improving the rights of women and minorities are more effective at reducing SEO negative announcement returns and underpricing. Our findings remain robust after controlling for possible self-selection bias and endogeneity problems. Overall, our findings support the stakeholder value maximization view of stakeholder theory and ethical theory.

The Effect of Voluntary Governance Rating Disclosures on SEOs and Acquisitions

Voluntary disclosures play an increasingly larger role in the corporate world, yet their implications remain controversial. On the one hand, voluntary disclosures create value by decreasing information asymmetry between managers and investors. On the other hand, they may be used opportunistically by the managers in capital market transactions and corporate development activities. We contribute to this debate by examining the effect of firms' voluntary disclosures of corporate governance ratings on the timing and performance of seasoned equity offerings (SEOs) and acquisitions. We conduct our analyses within the context of Turkey, one of the countries in which corporate governance scores are obtained on a voluntary basis. We find that firms which voluntarily disclose their governance ratings are less likely to undertake both SEOs and acquisitions which are commonly associated with managerial opportunism. Furthermore, these firms experience higher abnormal stock returns from the announcement of SEOs and acquisitions suggesting that voluntary disclosures of governance ratings provide credible signals to investors.

Corporate social responsibility and seasoned equity offerings

We examine whether corporate social responsibility (CSR) creates value for seasoned equity issuers. Using a sample of seasoned equity offerings (SEOs) by U.S. companies between 2004 and 2013, we find a positive association between CSR performance and the stock price reaction to SEO announcements. Surprisingly, however, further tests reveal that seasoned equity issuers with high CSR scores tend to have higher post-SEO increases in cash holdings, and lower investments in real assets, than issuers with low CSR scores. Moreover, high-CSR issuers have worse post-SEO operating and stock price performance than low-CSR issuers. Together, our findings suggest that high CSR scores mislead shareholders into attributing value-increasing motives to seasoned equity issues.

Influence of media coverage and sentiment on seasoned equity offerings

AbstractThis article examines the role of media in seasoned equity offerings (SEOs) price and market reactions on SEO announcements. Using a sample of SEO deals in UK, we find that media coverage is significantly and negatively related to SEO price discounts and market returns around SEO announcements. Moreover, we document that more pessimistic media sentiment predicts larger SEO price discounts and more negative market reactions to SEO announcements. In summary, both media coverage and media sentiment influence investor decisions in SEOs, but through different mechanisms.

Managerial optimism or managerial opportunism: From a seasoned equity offerings perspective

This study explores whether high-growth firms use accruals as a signal, rather than as a misleading device, in seasoned equity offerings (SEOs). For high-growth companies only, we find a positive relation between pre-SEO discretionary accruals and SEO announcement returns. We fail to find a negative relation between pre-SEO accruals and post-SEO long-run returns. Finally, we observe a positive relation between pre-SEO accruals and the long-run operating performance. Our findings suggest that high-growth firms are more likely to use high abnormal accruals during SEOs to signal managerial optimistic perspectives, while managerial opportunism is more likely to appear in non-high-growth firms.